Carter’s, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, reported its fourth quarter and fiscal 2019 results.

“We achieved our fourth quarter sales objective with growth driven by our retail and international businesses,” said Michael D. Casey, Chairman and Chief Executive Officer. “During the November and December holiday period, we saw good demand for our brands with comparable retail sales up over 2%. Profitability in the quarter was lower than last year, and reflects continued investments in our business and higher inventory-related costs.

“For the year, Carter’s is reporting a record level of sales, earnings and cash flow, and its 31st consecutive year of sales growth. In 2019, Carter’s strengthened its leading share of the $27 billion U.S. young children’s apparel market. Our growth was driven by the success of our exclusive brands designed for the largest retailers of young children’s apparel in North America, and stronger omni-channel capabilities in our direct-to-consumer business.

“In 2020, we are forecasting good growth in sales and profitability enabled by the strength of our brands and extensive market distribution capabilities throughout the world.”

Consolidated Results

Fourth Quarter of Fiscal 2019 compared to Fourth Quarter of Fiscal 2018

Consolidated net sales increased $14.1 million, or 1.3%, to $1.1 billion, principally driven by growth in the Company’s U.S. Retail and International segments. Favorable changes in foreign currency exchange rates improved consolidated net sales in the fourth quarter of fiscal 2019 by $0.3 million.

Operating income in the fourth quarter of fiscal 2019 decreased $7.8 million, or 4.6%, to $162.8 million, compared to $170.6 million in the fourth quarter of fiscal 2018. Operating margin in the fourth quarter of fiscal 2019 decreased 90 basis points to 14.8%, compared to 15.7% in the fourth quarter of fiscal 2018.

Adjusted operating income (a non-GAAP measure) decreased $8.3 million, or 4.9%, to $162.2 million, compared to $170.5 million in the fourth quarter of fiscal 2018. Adjusted operating margin (a non-GAAP measure) decreased 100 basis points to 14.7%, compared to 15.7% in the fourth quarter of fiscal 2018. This decline reflected higher inventory provisions, lower royalty income due to business model changes, and increased investments in technology, partially offset by higher sales and profitability in U.S. eCommerce and the elimination of operating losses in China due to changes in the Company’s business model in this market.

Net income in the fourth quarter of fiscal 2019 decreased $5.4 million, or 4.1%, to $125.1 million, or $2.82 per diluted share, compared to $130.6 million, or $2.83 per diluted share, in the fourth quarter of fiscal 2018.

Adjusted net income (a non-GAAP measure) decreased $6.2 million, or 4.7%, to $124.7 million, compared to $130.9 million in the fourth quarter of fiscal 2018. Adjusted earnings per diluted share (a non-GAAP measure) decreased 1.1% to $2.81, compared to $2.84 in the fourth quarter of fiscal 2018.

Fiscal Year 2019 compared to Fiscal Year 2018

Consolidated net sales increased $57.0 million, or 1.6%, to $3.5 billion, driven by growth in the Company’s U.S. Retail and U.S. Wholesale segments. Changes in foreign currency exchange rates adversely affected consolidated net sales in fiscal 2019 by $6.1 million. On a constant currency basis (a non-GAAP measure), consolidated net sales increased 1.8% in fiscal 2019.

Operating income in fiscal 2019 decreased $19.6 million, or 5.0%, to $371.9 million, compared to $391.4 million in fiscal 2018. Fiscal 2019 results included a $30.8 million non-cash charge related to the write-down of the Skip Hop tradename, expenses of $1.6 million related to organizational restructuring, and a total of $3.4 million in favorable changes in estimates and recoveries related to China business model changes, store restructuring, and customer bankruptcy matters. Fiscal 2018 results included $15.9 million in net charges, principally related to the Toys “R” Us bankruptcy and the Company’s business model change in China. Operating margin in fiscal 2019 decreased 70 basis points to 10.6%, compared to 11.3% in fiscal 2018.

Adjusted operating income (a non-GAAP measure) decreased $6.3 million, or 1.6%, to $401.0 million, compared to $407.3 million in fiscal 2018. Adjusted operating margin decreased 40 basis points to 11.4%, compared to 11.8% in fiscal 2018, reflecting changes in customer and product mix within U.S. Wholesale, higher performance-based compensation, lower royalty income due to business model changes, and increased investments in technology, partially offset by higher sales and profitability in U.S. eCommerce and the elimination of operating losses in China due to the Company’s business model change.

Net income in fiscal 2019 decreased $18.3 million or 6.5%, to $263.8 million, or $5.85 per diluted share, compared to $282.1 million, or $6.00 per diluted share, in fiscal 2018. Fiscal 2019 earnings included after-tax net charges totaling $27.9 million, comprised of $6.0 million related to early extinguishment of debt, the Skip Hop tradename impairment charge, organizational restructuring, and the favorable changes in estimates and recoveries noted above. Fiscal 2018 earnings include after-tax net expenses totaling $13.4 million, principally related to Toys “R” Us bankruptcy charges and business model change in China.

Adjusted net income (a non-GAAP measure) decreased $3.8 million, or 1.3%, to $291.7 million, compared to $295.4 million in fiscal 2018. Adjusted earnings per diluted share increased 2.7%, to $6.46, compared to $6.29 in fiscal 2018.

Cash flow from operations in fiscal 2019 was $387.2 million compared to $356.2 million in fiscal 2018. The increase primarily reflected changes in net working capital.

See the “Reconciliation of GAAP to Adjusted Results” section of this release for additional disclosures and reconciliations regarding non-GAAP measures.

U.S. Retail Segment

Fourth Quarter of Fiscal 2019 compared to Fourth Quarter of Fiscal 2018

U.S. Retail segment sales increased $13.5 million, or 2.2%, to $619.9 million. U.S. Retail comparable sales increased 1.6%, driven by growth in eCommerce sales.

In the fourth quarter of fiscal 2019, the Company opened 20 stores and closed three stores in the United States.

Fiscal Year 2019 compared to Fiscal Year 2018

U.S. Retail segment sales increased $33.0 million, or 1.8%, to $1.9 billion. U.S. Retail comparable sales increased 0.4%, driven by growth in eCommerce sales.

In fiscal 2019, the Company opened 43 stores and closed 25 stores¹ in the United States. As of the end of the fourth quarter of fiscal 2019, the Company operated 862 retail stores in the United States.

¹ Excludes five temporary Skip Hop stores that were closed in January 2019.

U.S. Wholesale Segment

Fourth Quarter of Fiscal 2019 compared to Fourth Quarter of Fiscal 2018

U.S. Wholesale segment sales decreased $2.5 million, or 0.7%, to $348.9 million, reflecting an $8.8 million decrease in off-price channel sales and increased demand for the Company’s exclusive Carter’s brands.

Fiscal Year 2019 compared to Fiscal Year 2018

U.S. Wholesale segment sales increased $25.0 million, or 2.1%, to $1.2 billion, reflecting increased demand for the Company’s exclusive Carter’s brands.

International Segment

Fourth Quarter of Fiscal 2019 compared to Fourth Quarter of Fiscal 2018

International segment sales increased $3.1 million, or 2.4%, to $131.7 million, reflecting growth in Canada and markets outside of North America, partially offset by the change in the Company’s business model in China. Favorable changes in foreign currency exchange rates improved International segment net sales in the fourth quarter of fiscal 2019 by $0.3 million. On a constant currency basis (a non-GAAP measure), International segment net sales increased 2.2%.

Fiscal Year 2019 compared to Fiscal Year 2018

International segment sales decreased $0.9 million, or 0.2%, to $429.5 million, reflecting the change in the Company’s business model in China and unfavorable movements in foreign currency exchange rates, partially offset by higher demand in Canada and growth in markets outside of North America. Changes in foreign currency exchange rates adversely affected International segment net sales in fiscal 2019 by $6.1 million. On a constant currency basis (a non-GAAP measure), International segment net sales increased 1.2%.

As of the end of fiscal 2019, the Company operated 201 retail stores in Canada and 46 retail stores in Mexico.

Return of Capital Initiatives

As part of the Company’s ongoing commitment to return capital to shareholders, the Company’s Board of Directors on February 13, 2020 authorized a new $500 million share repurchase program and approved a 20% increase ($0.10 per share) in its quarterly cash dividend, to $0.60 per share, for payment on March 20, 2020, to shareholders of record at the close of business on March 6, 2020.

From the beginning of fiscal 2007 through fiscal 2019, the Company has returned a total of $2.1 billion to shareholders through share repurchases and dividends, and retired approximately 42% of its outstanding shares.

The share repurchase authorization announced today permits the Company to repurchase shares of its common stock up to $500 million, in addition to approximately $172 million remaining under previous authorizations. Such purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at the discretion of the Company's management depending on market conditions, stock price, other investment priorities, and other factors. These share repurchase authorizations have no expiration date.

Future declarations of quarterly dividends and the establishment of related record and payment dates will be at the discretion of the Company’s Board of Directors based on a number of factors, including the Company’s future financial performance and other considerations.

Return of Capital Activity

In the fourth quarter and fiscal year 2019, the Company returned to shareholders a total of $71.5 million and $286.5 million, respectively, through share repurchases and cash dividends as described below.

Share Repurchases

During the fourth quarter of fiscal 2019, the Company repurchased and retired 499,552 shares of its common stock for $49.4 million at an average price of $98.98 per share. During fiscal 2019, the Company repurchased and retired 2,107,472 shares for $196.9 million at an average price of $93.43 per share.

Fiscal 2020 year-to-date through February 21, 2020, the Company has repurchased and retired a total of 220,943 shares for $24.1 million at an average price of $108.94 per share.

All shares were repurchased in open market transactions pursuant to applicable regulations for such share repurchases.

Dividends

During the fourth quarter of fiscal 2019, the Company paid a cash dividend of $0.50 per share totaling $22.1 million. In fiscal 2019, the Company paid quarterly cash dividends of $0.50 per share each quarter totaling $89.6 million.

2020 Business Outlook

For fiscal 2020 (a 53 week fiscal year), the Company projects net sales will increase approximately 2% to 3% and adjusted diluted earnings per share will increase approximately 4% to 6% compared to adjusted diluted earnings per share of $6.46 in fiscal 2019. This forecast for fiscal 2020 adjusted diluted earnings per share excludes anticipated expenses of approximately $10 million to $12 million related to organizational restructurings. Such restructurings include streamlining the Company’s retail field organization, improving distribution center staffing models, and relocating and consolidating various functions into its Atlanta office.

For the first quarter of fiscal 2020, the Company projects net sales will be comparable to the first quarter of fiscal 2019 and adjusted diluted earnings per share will be approximately $0.60 compared to adjusted diluted earnings per share of $0.87 in the first quarter of fiscal 2019. This forecast for first quarter fiscal 2020 adjusted diluted earnings per share contemplates: 1) increased investments in information technology, new stores, and marketing, and 2) lower royalty income reflecting the conclusion of a licensing agreement. This forecast for first quarter fiscal 2020 adjusted diluted earnings per share excludes anticipated expenses of approximately $10 million to $12 million related to organizational restructurings.

The Company is closely monitoring the outbreak of a respiratory illness caused by a novel coronavirus that was first detected in Wuhan, China. The virus has affected several industries within China, including textile production and manufacturing. The Company plans to source approximately 15% of its products from China in 2020. Additionally, the Company’s suppliers throughout Asia source a significant amount of fabric from China. Travel restrictions delayed the return of factory workers following the recent conclusion of the Chinese New Year holiday. The Company’s suppliers have not yet determined, with certainty, the impact of production delays. Accordingly, the financial impact of any delayed receipts from China is not known at this time. The Company’s guidance for fiscal year 2020 and the first quarter of fiscal 2020 does not include any adjustments for potential effects of the coronavirus situation.

The Company believes these non-GAAP measurements provide investors with a meaningful view of the Company’s core operating results, and are the same measurements used by the Company’s executive management to assess the Company’s performance.

Adoption of New Accounting Standards

Beginning in fiscal 2019, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification No. 842, Leases (“ASC 842”), which requires substantially all of its operating leases, including retail leases, to be recorded on the balance sheet as a right-of-use asset and lease liability. The adoption of ASC 842 had a material impact on the Company’s consolidated balance sheets, but did not have a material impact on its consolidated statements of operations or statements of cash flows.